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A long hit list and a legal strategy to bust trade barriers

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Roller-coaster pricing of raw materials has drawn attention to how some governments might try to keep resources from leaving their territory. Nucor Corp., with steel scrap as its chief input, wants to make sure that such action is included in Washington's agenda on trade distortions.

John Ferriola, chief operating officer of the Charlotte, N.C.-based company's steelmaking operations, sees lessons to be learned from the 2007-08 price run-up.

"Some of the reasons (it occurred) relate to supply and demand and natural market forces at work," he said. "However, unfair trade practices played a role as well. The United States, with a comparatively liberal trade regime, exports a large amount of steel scrap to other nations. Many other nations have erected substantial trade barriers to restrict steel scrap exports and maintain their scrap for their own domestic use." Such barriers also keep their domestic scrap cheaper than world levels, he added.

Ferriola can list 25 countries with restrictions, most belonging to the World Trade Organization. However, Russia is outside the WTO and can't be dealt with through that machinery. As such, Nucor helped establish an organization to lobby against these obstacles.

"The American Scrap Coalition is actively considering whether to ask the U.S. Trade Representative to take action against one or more countries with particularly egregious barriers. I can't say much more than that right now," said Timothy Brightbill, counsel to the group.

Ferriola's list of culprits includes India, a key steel country, with a 15-percent export tax on ferrous scrap; Pakistan, with a tax of 25 percent; Indonesia, which bans most scrap exports; and Saudi Arabia, which reimposed a ban on ferrous scrap exports after promising the WTO it wouldn't.

Russia discussed cutting its 15-percent export tax in talks aimed at gaining WTO membership, but Ferriola said that officials later threatened to impose a higher rate.

China, a major importer of ferrous scrap which before joining the WTO successfully negotiated for the privilege of setting such an export tax of up to 40 percent, currently has a 10-percent tax in place.

Unnecessarily high costs for steelmakers are felt throughout the economy, Ferriola said. "The record-high scrap prices that we reached recently were not good for Nucor's customers, particularly if they were unable to pass along unexpected price changes. Construction, automotive manufacturing, appliances and foundries are all impacted."

Ferriola acknowledges that one possible scenario is declining quantities of prompt industrial scrap in the United States even as world steel production increases.

"In the long term, there is the potential for a continued decline in U.S. manufacturing, in automotive and auto parts manufacturing in particular. This could reduce the availability of certain preferred types of scrap. We saw this earlier in the year in price spreads among various scrap grades," he said. "On the other hand, there are many other factors that could increase manufacturing demand and activity. Nucor is very confident in the American economy and American manufacturing in the long term, but we need our government to address trade distortions wherever they occur."

As for Nucor's purchase of Cincinnati-based scrap processor David J. Joseph Co. (DJJ) earlier this year, he said the two companies had cooperated closely for 38 years. "It is important to emphasize that DJJ is operating in the same manner as it always has, with the primary emphasis on maximizing profit for the long-term success of the company."

The tackling of scrap trade hurdles is an issue that also appeals to some smaller scrap consumers, such as Benton Foundry Inc. in Benton, Pa.

Even specialized grades of scrap, less likely to be shipped abroad, are affected when foreign buyers scoop up the cheaper obsolete metallics, Tim Brown, Benton Foundry's vice president, said. "The mills couldn't get enough of the lower-grade scrap that they wanted. They, in effect, bought up the grades (going after costlier sorts). That in turn exacerbated the price of scrap in the prime grades."

The foundry industry has found the Bush administration to be unsympathetic to complaints about Chinese trade abuses in matters that didn't involve scrap, Brown said. "Bush was afraid of the Chinese because they own so much of our debt. They've been financing us for the last couple of years. You don't want to (offend) the landlord."

While the weaker dollar has improved the ability of U.S. foundries to sell to foreign customers, it also has attracted foreign scrap buyers, notably from Turkey, according to Brown. But foreign government manipulation also has been a factor, he said, citing a Russian export tax on ferrous scrap that comes and goes depending on Russian mills' requirements.

Eliminating anti-market abuses won't always prevent scrap prices from rising, Thomas A. Danjczek, president of the Steel Manufacturers Association (SMA), acknowledged. "Scrap availability does not match the growth of steelmaking. Steelmaking is growing at a rate of 6 percent per year (worldwide); scrap availability is not growing at 6 percent per year. Scrap is likely to be in tight supply in years ahead."

Scrap's share of steelmaking inputs will decline for some years, until the goods made from the expanded steel output come to be discarded, Danjczek said. That makes it all the more important to resist unnecessary price rises caused by market manipulation.

Companies can face higher prices "as long as it's for valid economic reasons. If it's market manipulation, that's a different circumstance. We have an obligation to keep our costs down, to service our customer base," he said. PAUL SCHAFFER

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